Government's budget deficit figures often influence the mood of stock markets and stocks prices. Should investors really be bothered?
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UDAYAN RAY Welcome to Fundoo Money, your 24X7 buddy on all matters related to personal finance. In this web series, we are discussing various things you need to keep in mind while investing in stocks. That’s right we’re talking about stock market investing, but there are no tips here. There are no quick fixes, no quick formulas for you to get rich.
In this particular segment we are going to be focusing on a big picture sort of an issue which lot of people think impacts stock prices, share prices, stock market sentiment which is basically the state of government finances. You hear words like budget deficit, fiscal deficit and what not deficit. How do they impact stock prices? This is coming up shortly.
Well fiscal deficit, budget deficit, those are the kinds of terms you hear day in and day out in the pink press and television programs. What does an investor investing in stocks, whether he is an existing investor, or a person who is looking into investing in stocks, make of these terms and these figures that are thrown about. To help us decode it we have stock market expert Mohit Satyanand.
MOHIT SATYANAND Hi Udayan!
UDAYAN RAY Mohit, too many big, big terms, fiscal deficit, primary deficit, budget deficit, this deficit and that deficit. How does a person figure out what it means for his potential or existing stock market investments?
MOHIT SATYANAND Ignore it!
UDAYAN RAY That’s an answer -- that is possibly the shortest answer to that question.
MOHIT SATYANAND Look, I think that the worst is behind us. The kind of fiscal irresponsibility that we have seen in the past, I don’t think….you know the managers of the Indian economy, by which I mean the Ministry of Finance and the RBI, have matured considerably over the last 20-25 years. The kind of fiascos we saw in the 80s and which led up to the crisis of ’91, I don’t think we are going to see them again, number 1.
Number 2, I think for a growing economy like ours, where we’re hugely under-invested in infrastructure, we are hugely under-invested in most public goods. We are bound to see fiscal deficits. It’s going to be a long time before we say bye to them.
We are also a democracy. We have this perpetual election cycle going on, state elections, general elections etc. etc. Each of them lead to more government expenditure. So, we are going to see fiscal deficits. And if you see fiscal deficits, to some extent, you are going to see inflation as well. And as I said, I personally as an investor, have made my peace with this. And I say you know we are going to look at 4 or 5% fiscal deficit, we are going to look at 7 or 8% inflation and just factor them in to what you’re doing. But most importantly remember that guys who run companies have got used to dealing with all of these things. And if you look at the kind of historical returns they’ve made, haven’t they been able to grow with these? Have they been able to make the right investment decisions? If yes, then they are doing your work for you. You don’t need to worry too much about the macros.
UDAYAN RAY So, basically one of the things that is coming out (from the discussion is) that instead of relying on big picture, assume that there is a smart company which has figured all of it out— inflation going up, budget deficit etc. When we are talking of budget deficit or any kind of deficit, somebody, in this case the government, has an income and the spending is actually spending more than its income and it is borrowing from somewhere, to bridge it.
So, there is a smart company or smart companies which have figured it out. The job of the investor is to figure out those companies which are doing a smart job because you can ride them like good horses and make them drive your investments ahead. So that’s the sense that one needs to keep in mind. As Mohit said it in a word, ignore it.
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